Law of Diminishing Marginal Utility – Graph and Example

The law of diminishing marginal utility is one that occurs as a result of the declining value of an asset in comparison with other assets as it incorporates a new unit of that good and is known by the name of marginal utility.

Law of Diminishing Marginal Utility Graph

We can see the graph of law of diminishing marginal utility, which shows that as more goods or goods are consumed, their marginal utility decreases becoming in some cases negative (the marginal utility in green color can be seen in the image).

This theory is applied more in capitalist societies where the accumulation of a good or goods is a common element of these and allows identifying marginal utilities that diminish with the passage of time forming utility curves with negative slope.

Example of Law of Diminishing Marginal Utility

Suppose a person who does not have shoes to go to work and decides to buy new ones. This person has a positive initial marginal utility. As you wear your shoes you will be buying more and more and your degree of satisfaction will be less because of the accumulation of more goods. Therefore, the marginal utility will become constant in time and then become decreasing. In a society capitalist , this theory is very common since society tends to accumulation and oblivion of many goods that are purchased.

Another example can be found in a child when they buy toys, over time, because they have more toys, stop playing with antique toys losing their interest in playing with them. In this case, the marginal utility does not refer to a material value and their economic quantification, but rather the ability of consumption and its assessment.

Law that states that the marginal utility of a good for each consumer decreases when each extra unit of the good consumed causes a smaller increase in its usefulness.

Diminishing Marginal Utility and Demand

In the middle of the nineteenth century, a series of ideas appeared in several European countries, which, apart from historical and institutional considerations, but also forms of organization of production, proposed to explain the value of goods from the individual psychology. Put another way, the “objective” conception of value – built on production costs, particularly in labor – was abandoned in favor of a “subjective” approach based on consumer behavior, determined by its “tastes” and its resources.

The Principle of Diminishing Marginal Utility

For those who are the founders of this new trend, the Englishman Stanley Jevons (1835-1882), the Austrian Karl Menger (1840-1921) and the Frenchman Leon Walras (1834-1921), would exist, beyond the diversity of the tastes Individual, a psychological law, according to which the satisfaction achieved by the consumption of a good increases with the increase of consumption, but such increase of satisfaction occurs at an increasingly weaker pace, so that there is a progressive saturation, But never total.

Such a “psychological law,” which for some as Jevons is explained by purely psychological reasons, has been called the law of diminishing marginal utility; In this case the word “utility” denotes satisfaction or pleasure achieved, while the adjective “marginal” underlines the fact that the utility of the last unit consumed decreases as consumption increases.

Thus, to give a simple example, if the consumption of an apple gives a utility of 10, that of two apples a utility of 15 and that of three apples 18, then the marginal utility of the second apple is equal to 15-10, That is to say 5, while that of the third apple is 18-15, that is 3. Now, since 3 is less than 5, the law of decreasing marginal utility has been verified, at least in this example.

Let us emphasize that this law is not expressed by a clear formula, contrary to what happens in physics, for example; So it is not specified at what rate marginal utility decreases as consumption increases since it varies from one individual to another; Is content to give the sense of such a variation, which is assumed to be the same for the whole world. Now, the fact of enunciating qualitative hypotheses – a sense of variation, a form of the curve – rather than quantitative ones – expressed in numbers – is typical in microeconomics, where diversity and complexity make any quantitative measure problematic.

Marginal Utility

Marginal Utility is a concept used in microeconomics and economic theory.

Marginal utility is the change in the total Utility that the Consumer experiences as a result of varying in a very small amount the Consumption of a certain Good, remaining constant the Consumption of the other Goods.

From the concept of Marginal Utility derives the Law of Declining Marginal Utility.

This law postulates that as an individual consumes additional units of a Good, the satisfaction or Total Utility that he obtains will increase, but in an increasingly smaller proportion, until a time comes when consuming more units of said Good will cause him a disutility, That is, discomfort.

As an example, consider the great satisfaction of drinking a glass of cold water on a hot day, and perhaps a second glass. But after ten glasses of water we may have more discomfort than satisfaction.

For an extension of the concept of Marginal Utility see Utility.

Marginal Utility is the increase or decrease of total profit that accompanies the increase or decrease in the amount of a good. An example that illustrates this is the case of a thirsty person who finds a glass of water in the desert. The first glass will be extremely valued. But if you take a second glass, that valuation is going to be smaller. The glass number 10 probably will not generate any pleasure, and may even cause discomfort.

The deepest root of Marginal Utility is found in Jacques Turgot and later in Stanley Jevons, but the formal exhibition of Marginal Utility was done by Alfred Marshall.

Law of Diminishing Marginal Utility

Principles according to which the consumption of additional units of a good generates an additional utility or satisfaction.

In other words, this law establishes that the value conferred by a rational consumer on the successive units of a given commodity decreases progressively, as the total consumption of the commodity increases, ceteris paribus.

The justification for the diminishing character of marginal utility rests on common sense, which shows that as additional quantities of a certain good are consumed, the additional satisfaction they provide is less, since the consumer is gradually being saturated.

Imagine an individual who likes cookies and offers three.

Once consumed, you continue to offer one by one, so that gradually is filling and the satisfaction you get with each additional cookie you eat is less.

Taken to the extreme, there will be a point at which the consumption of another biscuit could produce a unit (disutility): Precisely for that quantity the total utility function will have reached its maximum and marginal utility begins to be not only decreasing but negative.

It is interesting to compare the form of the total utility curve and that of the decreasing marginal utility:

The utility derived from the last additional unit of the good consumed decreases until reaching the point X0: In this, the consumer would be saturated and one more unit would not only report less satisfaction, but would displease it, the UM begins to be negative.

The decreasing rate of marginal utility is accepted as a general rule, this is a guideline that is fulfilled in most cases.

However, there are situations where this can be constant at some intervals or even increasing.

For some economists, for example, money has a constant marginal utility between certain stretches.

Eg, the marginal utility of a good stamp collector is likely to be increasing, since the satisfaction he experiences each time he gets a new stamp, almost unique in the world, far from diminishing increases.

Note also that the law of diminishing marginal utility is linked to the cardinal approach of the measure of satisfaction in the theory of consumer behavior.

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